REVIEW PROBLEM 1: VARIANCE ANALYSIS USING A FLEXIBLE BUDGET

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1 REVIEW PROBLEM 1: VARIANCE ANALYSIS USING A FLEXIBLE BUDGET Harrald's Fish House is a family-owned restaurant that specializes in Scandinavian-style seafood. Data concerning the restaurant's monthly revenues and costs appear below (q refers to the number of meals served): 1. Prepare the restaurant's planning budget for April assuming that 1,800 meals are served. 2. Assume that 1,700 meals were actually served in April. Prepare a flexible budget for this level of activity. 3. The actual results for April appear below. Compute the revenue and spending variances for the restaurant for April. Solution to Review Problem 1. The planning budget for April appears below: 2. The flexible budget for April appears below:

2 3. The revenue and spending variances for April appear below: REVIEW PROBLEM 2: STANDARD COSTS Xavier Company produces a single product. Variable manufacturing overhead is applied to products on the basis of direct labor-hours. The standard costs for one unit of product are as follows: During June, 2,000 units were produced. The costs associated with June's operations were as follows: Compute the direct materials, direct labor, and variable manufacturing overhead variances. Solution to Review Problem Direct Materials Variances Page 362

3 Direct Labor Variances Variable Manufacturing Overhead Variances

4 FOUNDATIONAL 15 Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows: The company also established the following cost formulas for its selling expenses: The planning budget for March was based on producing and selling 25,000 units. However, during March the company actually produced and sold 30,000 units and incurred the following costs: a. Purchased 160,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in production. b. Direct-laborers worked 55,000 hours at a rate of $15.00 per hour. c. Total variable manufacturing overhead for the month was $280,500. d. Total advertising, sales salaries and commissions, and shipping expenses were $210,000, $455,000, and $115,000, respectively. 1. What raw materials cost would be included in the company's flexible budget for March? 2. What is the materials quantity variance for March? 3. What is the materials price variance for March? 4. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in production, what would be the materials quantity variance for March? If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in 5. production, what would be the materials price variance for March? 6. What direct labor cost would be included in the company's flexible budget for March? 7. What is the direct labor efficiency variance for March? 8. What is the direct labor rate variance for March? 9. What variable manufacturing overhead cost would be included in the company's flexible budget for March? 10. What is the variable overhead efficiency variance for March? 11. What is the variable overhead rate variance for March? 12. What amounts of advertising, sales salaries and commissions, and shipping expenses would be included in the company's flexible budget for March? 13. What is the spending variance related to advertising? 14. What is the spending variance related to sales salaries and commissions? 15. What is the spending variance related to shipping expenses?

5 EXERCISE 8 1 Prepare a Flexible Budget [LO1] Gator Divers is a company that provides diving services such as underwater ship repairs to clients in the Tampa Bay area. The company's planning budget for March appears below: During March, the company's activity was actually 190 diving-hours. Prepare a flexible budget for that level of activity. EXERCISE 8 2 Prepare a Report Showing Revenue and Spending Variances [LO2] Olympia Bivalve farms and sells oysters in the Pacific Northwest. The company harvested and sold 7,000 pounds of oysters in July. The company's flexible budget for July appears below:

6 The actual results for July appear below: Prepare a report showing the company's revenue and spending variances for July. EXERCISE 8 3 Prepare a Flexible Budget with More Than One Cost Driver [LO3] Icicle Bay Tours operates day tours of coastal glaciers in Alaska on its tour boat the Emerald Glacier. Management has identified two cost drivers the number of cruises and the number of passengers that it uses in its budgeting and performance reports. The company publishes a schedule of day cruises that it may supplement with special sailings if there is sufficient demand. Up to 80 passengers can be accommodated on the tour boat. Data concerning the company's cost formulas appear below: Budgeted passengers = 3,400 For example, vessel operating costs should be $6,800 per month plus $ per cruise plus $3.50 per passenger. The company's sales should average $28.00 per passenger. The company's planning budget for August is based on 58 cruises and 3,200 passengers. Prepare the company's planning budget for August. EXERCISE 8 4 Material Variances [LO4] Harmon Household Products, Inc., manufactures a number of consumer items for general household use. One of these products, a chopping board, requires an expensive hardwood. During a recent month, the company manufactured 4,000 chopping boards using 11,000 board feet of hardwood. The hardwood cost the company $18,700. The company's standards for one chopping board are 2.5 board feet of hardwood, at a cost of $1.80 per board foot. 1. According to the standards, what cost for wood should have been incurred to make 4,000 chopping blocks? How much greater or less is this than the cost that was incurred? 2. Break down the difference computed in (1) above into a materials quantity variance and a materials price variance.

7 EXERCISE 8 5 Direct Labor Variances [LO5] AirMeals, Inc., prepares in-flight meals for a number of major airlines. One of the company's products is stuffed cannelloni with roasted pepper sauce, fresh baby corn, and spring salad. During the most recent week, the company prepared 6,000 of these meals using 1,150 direct labor-hours. The company paid these direct labor workers a total of $11,500 for this work, or $10 per hour. According to the standard cost card for this meal, it should require 0.20 direct labor-hours at a cost of $9.50 per hour. 1. According to the standards, what direct labor cost should have been incurred to prepare 6,000 meals? How much does this differ from the actual direct labor cost? 2. Break down the difference computed in (1) above into a labor efficiency variance and a labor rate variance. EXERCISE 8 6 Variable Overhead Variances [LO6] Order Up, Inc., provides order fulfillment services for dot.com merchants. The company maintains warehouses that stock items carried by its dot.com clients. When a client receives an order from a customer, the order is forwarded to Order Up, which pulls the item from storage, packs it, and ships it to the customer. The company uses a predetermined variable overhead rate based on direct labor-hours. In the most recent month, 140,000 items were shipped to customers using 5,800 direct labor-hours. The company incurred a total of $15,950 in variable overhead costs. According to the company's standards, 0.04 direct labor-hours are required to fulfill an order for one item and the variable overhead rate is $2.80 per direct labor-hour. 1. According to the standards, what variable overhead cost should have been incurred to fill the orders for the 140,000 items? How much does this differ from the actual variable overhead cost? 2. Break down the difference computed in (1) above into a variable overhead efficiency variance and a variable overhead rate variance. EXERCISE 8 7 Planning Budget [LO1] Auto Lavage is a Canadian company that owns and operates a large automatic carwash facility near Quebec. The following table provides data concerning the company's costs: For example, electricity costs are $1,400 per month plus $0.10 per car washed. The company expects to wash 8,000 cars in October and to collect an average of $5.90 per car washed. Prepare the company's planning budget for October. EXERCISE 8 8 Flexible Budget [LO1] Refer to the data for Auto Lavage in Exercise 8 7. The company actually washed 8,100 cars in October. Prepare the company's flexible budget for October.

8 EXERCISE 8 9 Prepare a Report Showing Revenue and Spending Variances [LO2] Refer to the data for Auto Lavage in Exercises 8 7 and 8 8. The actual operating results for October appear below: Prepare a report showing revenue and spending variances. EXERCISE 8 10 Labor and Variable Manufacturing Overhead Variances[LO5, LO6] Hollowell Audio, Inc., manufactures military-specification compact discs. The company uses standards to control its costs. The labor standards that have been set for one disc are as follows: During July, 2,125 hours of direct labor time were required to make 20,000 discs. The direct labor cost totaled $49,300 for the month. 1. According to the standards, what direct labor cost should have been incurred to make the 20,000 discs? By how much does this differ from the cost that was incurred? 2. Break down the difference in cost from (1) above into a labor efficiency variance and a labor rate variance. 3. The budgeted variable manufacturing overhead rate is $16.00 per direct labor-hour. During July, the company incurred $39,100 in variable manufacturing overhead cost. Compute the variable overhead efficiency and rate variances for the month. EXERCISE 8 11 Working Backwards from Labor Variances [LO5] The Worldwide Credit Card, Inc., uses standards to control the labor time involved in opening mail from card holders and recording the enclosed remittances. Incoming mail is gathered into batches, and a standard time is set for opening and recording each batch. The labor standards relating to one batch are as follows: The record showing the time spent last week in opening batches of mail has been misplaced. However, the batch supervisor recalls that 168 batches were received and opened during the week, and the controller recalls the following variance data relating to these batches:

9 1. Determine the number of actual labor-hours spent opening batches during the week. 2. Determine the actual hourly rate paid to employees for opening batches last week. (Hint: A useful way to proceed would be to work from known to unknown data either by using the variance formulas or by using the columnar format shown inexhibit 8 12.) EXERCISE 8 12 Working with More Than One Cost Driver [LO2, LO3] The Toque Cooking Academy runs short cooking courses at its small campus. Management has identified two cost drivers that it uses in its budgeting and performance reports the number of courses and the total number of students. For example, the school might run four courses in a month and have a total of 60 students enrolled in those four courses. Data concerning the company's cost formulas appear below: For example, administrative expenses should be $3,940 per month plus $46 per course plus $7 per student. The company's sales should average $850 per student. The actual operating results for October appear below: 1. The Toque Cooking Academy expects to run four courses with a total of 60 students in October. Prepare the company's planning budget for this level of activity. 2. The school actually ran four courses with a total of 58 students in October. Prepare the company's flexible budget for this level of activity. 3. Calculate revenue and spending variances for October. EXERCISE 8 13 Material and Labor Variances [LO4, LO5] Sonne Company produces a perfume called Whim. The direct materials and direct labor standards for one bottle of Whim are given below: During the most recent month, the following activity was recorded:

10 a. Twenty thousand ounces of material were purchased at a cost of $2.40 per ounce. b. All of the material was used to produce 2,500 bottles of Whim. c. Nine hundred hours of direct labor time were recorded at a total labor cost of $10, Compute the direct materials quantity and price variances for the month. 2. Compute the direct labor efficiency and rate variances for the month. EXERCISE 8 14 Material Variances [LO4] Refer to the data in Exercise Assume that instead of producing 2,500 bottles of Whim during the month, the company produced only 2,000 bottles using 16,000 ounces of material. (The rest of the material purchased remained in raw materials inventory.) See Exercise 8 13 Compute the direct materials quantity and price variances for the month. EXERCISE 8 15 Flexible Budgets and Revenue and Spending Variances[LO1, LO2] Gelato Supremo is a popular neighborhood gelato shop. The company has provided the following data concerning its operations: While gelato is sold by the cone or cup, the shop measures its activity in terms of the total number of liters of gelato sold. For example, wages should be $4,800 plus $1.20 per liter of gelato sold, and the actual wages for July were $11,200. Gelato Supremo expected to sell 5,000 liters in July, but actually sold 4,900 liters. Prepare a report showing Gelato Supremo revenue and spending variances for July.

11 PROBLEM 8 18A Comprehensive Variance Analysis [LO4, LO5, LO6] Portland Company's Ironton Plant produces precast ingots for industrial use. Carlos Santiago, who was recently appointed general manager of the Ironton Plant, has just been handed the plant's contribution format income statement for October. The statement is shown below: Mr. Santiago was shocked to see the loss for the month, particularly because sales were exactly as budgeted. He stated, "I sure hope the plant has a standard cost system in operation. If it doesn't, I won't have the slightest idea of where to start looking for the problem." The plant does use a standard cost system, with the following standard variable cost per ingot: During October the plant produced 5,000 ingots and incurred the following costs: 1. a. Purchased 25,000 pounds of materials at a cost of $2.95 per pound. There were no raw materials in inventory at the beginning of the month. 2. b. Used 19,800 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.) 3. c. Worked 3,600 direct labor-hours at a cost of $8.70 per hour. 4. d. Incurred total variable manufacturing overhead costs of $4,320 for the month. A total of 1,800 machinehours was recorded. 1. Compute the following variances for October: a. Direct materials quantity and price variances. b. Direct labor efficiency and rate variances. c. Variable overhead efficiency and rate variances. 2. Summarize the variances that you computed in requirement 1 by showing the net overall favorable or unfavorable variance for October. If the company closed all variances to cost of goods sold, what impact did the net overall favorable or unfavorable variance have on the company's income statement? 3. Pick out the two most significant variances that you computed in requirement 1. Explain to Mr. Santiago possible causes of these variances.

12 . PROBLEM 8 20A Basic Variance Analysis; the Impact of Variances on Unit Costs [LO4, LO5, LO6] Landers Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May. The production superintendent was pleased when he saw this report and commented: "This $0.40 excess cost is well within the 2 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product." Actual production for the month was 12,000 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials. 1. Compute the following variances for May: a. Materials quantity and price variances. b. Labor efficiency and rate variances. c. Variable overhead efficiency and rate variances. 2. How much of the $0.40 excess unit cost is traceable to each of the variances computed in (1) above. 3. How much of the $0.40 excess unit cost is traceable to apparent inefficient use of labor time? 4. Do you agree that the excess unit cost is not of concern? PROBLEM 8 23A Flexible Budgets and Spending Variances [LO1, LO2] You have just been hired by SecuriDoor Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company's costing system and "do what you can to help us get better control of our manufacturing overhead costs." You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control. After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for April:

13 During April, the company worked 18,000 machine-hours and produced 12,000 units. The company had originally planned to work 20,000 machine-hours during April. 1. Prepare a flexible budget for April. 2. Prepare a report showing the spending variances for April. Explain what these variances mean. Budgeted revenue per liter = $14.50